Meltdown 101: The logic behind a GM plant shutdown

Thursday

A General Motors plan to temporarily close several U.S. factories this summer makes lots of financial sense for the beleaguered automaker, but not for the obvious reason.

Sure, massive assembly lines cost money to run. Halting them for a few weeks will trim the utility bills. And saving money is important, especially when a company lives on government loans.

But the real benefit lies in paring down a car inventory that has swollen beyond reason.

Here are some questions and answers about plant closings and why they can make sense for carmakers.

Q: Why do carmakers need to reduce their inventory? Can't they just park cars until people start buying again?

A: Not if they want to stay in business for a long time.

Carmakers are paid when their vehicles reach the shipping carrier that will take them to a dealer's lot. They're not paid simply to build cars.

If they make a car that wasn't ordered by a dealer, that means they've just poured as much as $25,000 into a shiny new vehicle that provides no revenue in return, said Gerald Meyers, a University of Michigan business professor and former chairman of American Motors Corp.

"They're constipated," Meyers said of GM. "They've got too many cars in the field."

Q: How big has GM's inventory grown?

A: GM had a 123-day supply of cars and trucks at the end of March, according to Ward's AutoInfoBank. That included more than a six-month supply of models like the Pontiac G5 compact and Chevrolet Silverado hybrid pickup truck.

Carmakers generally want a 60-day inventory, said David Cole, chairman of the Center for Automotive Research.

Q: Ouch! Can't they just offer potential buyers some sort of great deal to sell all those cars?

A: That's what they're trying to stop doing, actually.

Incentives for buyers are at record-high numbers. Steep discounts cut into the money an automaker receives for each car. Basically, the car business has become too much of a buyer's market over the past several years, and carmakers need to restore some balance.

"You can't even begin to think about that until you get the inventory whittled down," Cole said.

A carmaker with too many unsold cars has little leverage over a buyer looking for a great deal.

Q: Don't they save some labor costs by temporarily closing a plant?

A: They can, but GM will still have to pay its workers something. The United Auto Workers union contract requires the company to make up much of the difference between state unemployment benefits and their wages.

A plant's white collar work force, which has no UAW contract, can use vacation time to continue getting paid during part of the shutdown period. Beyond that, it's not yet clear whether they will lose any or all of their pay while the plants are closed. GM may be motivated to offer some compensation, to avoid losing them to other employers - which would force the company to find and train replacements.

Q: How hard is it to close a huge factory?

A: There's more to it than you may think.

Plant engineers and maintenance crews have to stay on duty, because the assembly lines must be kept in shape. That means certain equipment will have to stay lubricated.

A shutdown offers a prime opportunity to replace or adjust faulty equipment or give the paint booths the scouring they've long deserved, Meyers noted. But that new equipment must be tested to make sure it runs smoothly.

"The hope is you can go dark, you can just shut everything down and turn the lights off, lock the doors," Meyers said. "But you can't do that because it will jeopardize the relaunch."

GM normally shuts down its assembly plants for two weeks each summer to prepare for the new model year, but several assembly plants will see additional down weeks on top of that.

Q: The workers still get paid, the carmaker trims inventory. Is anyone hurt by a plant shutdown?

A: Absolutely. If car factories aren't making anything, they won't be ordering parts - and that means parts suppliers will see business grind to a halt.

"This could be a big hit on suppliers, there's no question about it," Cole said.

AP Auto Writer Tom Krisher in Detroit contributed to this report.

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